Zimbabwe: Gono pulls banking fat from fire.

Zimbabwe's banking system came very close to total collapse last month when fears of bank failures started a run by the public and companies refused to accept cheques. Rob Rose reports.

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Zimbabwe's Reserve Bank governor, Gideon Gono has had a torrid two months in office as the country's banking system came close to the brink of collapse at the beginning of January. The crisis was shocking in its intensity and even caused ripples in the stable banking sector of neighbouring South Africa.

Gideon Gono's rapid and bold steps appeared to have calmed the stormy waters at the moment but public confidence in the country's banking system has been severely shaken. At the crisis' worst point, Zimbabwe's Reserve Bank had suspended seven of the 17 banks operating in the country from settling inter-bank debts through the central bank's settlement system due to concerns that these struggling institutions did not have sufficient money to pay the other banks.

As liquidity problems became apparent at these banks--a third of the country's registered banks--the problem spread tentacle-like into an economy already suffering a recession that some have likened to that of Germany prior to the Second World War with inflation running at around 700%.

Companies, fearing that their cheques would not be honoured, began refusing to accept any form of cheques and with confidence in the banking system starting to crumble, public fears began to spread. One of the institutions involved, admitted that consumers had withdrawn up to 30% of their deposits during the crisis while the independent Zimbabwean media reported runs on some of the other new banks.

As the crisis escalated, South African banking giants Absa, Nedcor and Standard Bank, all of which have major stakes in Zimbabwean banks, voiced their public concerns that the brewing banking crisis could spark a systemic collapse of public confidence in the banking system--a worst case scenario that would have affected all the banks operating in the country. Little wonder then that Reserve Bank governor was forced to step in and make an apparent U-turn from his December policy statement.

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In December, Gono had said: "the curtain has been drawn against the era for the proliferation of weak, poorly managed financial institutions dependent on cheap and unlimited central bank credit".

This sounded like the death knell for the system that allowed the banks to borrow from the Reserve Bank at a...